Ireland’s banks

Concentrating binds

Most Irish still bank with their government—and it is costing them

AFTER five years of crisis and a bail-out costing over €64 billion ($87 billion), Ireland’s banks appear to be on the mend. On December 4th Bank of Ireland announced plans to repay part of its bail-out, €1.8 billion of preference shares, to the Irish government. But Ireland is still suffering from the baleful consequences of its bank rescue in other ways. As well as propelling public debt from 25% of GDP to 123%, it has made Ireland’s banking industry one of the most concentrated in the world. Of Ireland’s six big native banks before the crisis, only three are now still in business—all of which have big public shareholdings. The Irish state owns virtually all of Allied Irish Bank (AIB) and Permanent TSB, as well as a 14% stake in Bank of Ireland.

Foreign-owned banks, meanwhile, are leaving. British-based Bank of Scotland returned its local licence in 2010; Denmark’s Danske Bank and ACCBank, a subsidiary of Rabobank of the Netherlands, plan to do the same. The foreigners complain that shrinking borrowing, along with paper-thin interest margins (the difference between the rates at which banks borrow and lend), make it unattractive for them to stay (see chart). The biggest foreign lender left, Ulster Bank, is also state-owned, by Britain, which holds a controlling stake in its parent, Royal Bank of Scotland.

This has left AIB and Bank of Ireland in a near-duopoly. Between them they now provide over 86% of new mortgage lending. Indeed, the duopoly is more of a monopoly, given the government’s big stakes in both. Together they are already displaying pricing power over the market.

That leaves Ireland’s politicians in an awkward position. Under normal circumstances, governments try to foster competition among banks, in the hope of spurring the economy by making it cheaper to borrow. But as a shareholder, the Irish government would benefit if the two big banks improved their margins. That might help stem their losses—of €1.34 billion in the first half of this year—and thus curb Irish taxpayers’ already enormous bill for the bail-out. Such an improvement, however, would involve raising interest rates for Ireland’s borrowers or lowering them for its savers—to the economy’s detriment.

The two big banks have already used their dominant position to boost their performance. Bank of Ireland’s interest margin, for instance, increased from 1.25% in 2012 to 1.90% in the third quarter of this year, without much loss in market share. According to Emer Lang at Davy, a stockbroker, much of the increase has come from failing to pass on its lower funding costs to its borrowers, as well as actively raising interest rates for some.

The impact of this trend—scarcer and more expensive credit—has already hit Ireland’s economy. Mortgage arrears have risen rapidly, reaching 17% of the value of loans to owner-occupiers and 29% of those on buy-to-let properties. Legal reforms earlier this year have made it easier to repossess properties from defaulters. That will boost banks’ profits, but squeeze already weak consumer spending even more. Irish firms are also finding it harder to borrow. According to a survey published on December 2nd by ISME, a business association, the refusal rate for new credit applications for smaller firms has risen since June by six percentage points.

The European Union’s and the IMF’s three-year stint as backstop creditors for the Irish government formally comes to an end on December 15th. That makes Ireland the first of the five euro-zone countries in receipt of international bail-outs to stand again on its own two feet. But it would be wrong to say Ireland’s problems are over. The IMF predicts that its economy will grow by only about 2% a year until 2018—a feeble pace compared to rates of over 10% during the boom. According to Deutsche Bank, Ireland’s banks will need more public money if they are to comply with new international rules on capital. Returning them to health will weigh heavily on the rest of Ireland’s economy—and on its politics—for years to come.